Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity.
Perpetual bonds vs. equity
- Although similar to equity, perpetual bonds do not have attached votes and, therefore, provide no means of control over the issuer.
- Also, perpetual bonds are still fixed-income securities; therefore, paying coupons is mandatory whereas paying dividends on equity is discretional.
- Examples of perpetual bonds are consols issued by the UK Government.
- One of the oldest examples of a perpetual bond was issued in 1648 by the Dutch water board of Lekdijk Bovendams. It is currently in the possession of Yale University and interest was most recently paid in 2015.
- Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital and help the banks fulfill their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.
Perpetual bonds are valued using the formula:
- is an annual coupon interest on a bond.
- is an expected yield for maximum term available.
- "Perpetual debt in favour, but yields may fall", LiveMint.com, July 7, 2007